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Edition Fifteen – June 2013

Insight: Fragile AIM! Fracking boom is doom for overpriced oil Will the International Energy Agency's oil forecast be wrong again?


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Adam Marmaras Chief Executive Officer Issue 15 – June 2013 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: press@oilvoice.com Skype: oilvoicetalk Editor James Allen Email: james@oilvoice.com Director of Sales Terry O'Donnell Email: terry@oilvoice.com Chief Executive Officer Adam Marmaras Email: adam@oilvoice.com Social Network Facebook

Welcome to the 15th edition of the OilVoice magazine. This month we have some great articles from Kurt Cobb, David Bamford, Gail Tverberg, Andrew McKillop and Ed Collins. At OilVoice we are continually working on the site, either adding a new section, or improving a current one. One area of the site that has received a lot of focus over the past 6 months is the jobs board. And the work is paying off. We currently have around 1100 active oil and gas jobs online. More importantly though, the number of applicants applying is doubling month on month. It's a new growth area for the site, and makes up around a third of our traffic. Well worth a look... Hope you enjoy reading this latest edition of the OilVoice magazine. If you'd like to contribute, please get in touch.

Twitter Google+ Linked In Read on your iPad You can open PDF documents, such as a PDF attached to an email, with iBooks.

Adam Marmaras CEO OilVoice


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Contents Featured Authors Biographies of this months featured authors

Insight: The Challenger! by David Bamford

3 4 8 14 16 19

Review: The Bight Basin: From regional context to licence block evaluation by Ed Collins

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Will the International Energy Agency's oil forecast be wrong again? by Kurt Cobb Oil limits and climate change by Gail Tverberg Recent Company Profiles The most recent companies added to the OilVoice directory Fracking boom is doom for overpriced oil by Andrew McKillop

Oil rides with the asset bubble - but not forever by Andrew McKillop Insight: Fragile AIM! by David Bamford

26 29

Why the renewable energy industry ought to support U.S. natural gas exports by Kurt Cobb

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Reaching oil limits - New paradigms are needed by Gail Tverberg European gas industry's green rage by Andrew McKillop

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Featured Authors Kurt Cobb Resource Insights Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude.

Gail Tverberg Our Finite World Gail the Actuary’s real name is Gail Tverberg. She has an M. S. from the University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.

Andrew McKillop AMK CONSULT Andrew McKillop is a regular contributor to OilVoice

David Bamford Finding Petroleum David Bamford is 63. He is a non-executive director at Tullow Oil plc and has various roles with Parkmead Group plc, PARAS Ltd and New Eyes Exploration Ltd, and runs his own consultancy.

Ed Collins Neftex Ed Collins is a Geoscientist at Neftex Petroleum Consultants Ltd.


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Will the International Energy Agency's oil forecast be wrong again? Written by Kurt Cobb from Resource Insights The famous Danish physicist Niels Bohr once humorously observed, "Predictions are very difficult, especially about the future." And so, as the world considers yet another rosy oil supply forecast, this time from the Paris-based International Energy Agency (IEA), it is worth reviewing the agency's record. Back in the year 2000, the IEA divined that by 2010, liquid fuel production worldwide would reach 95.8 million barrels per day (mbpd). The actual 2010 number was 87.1 mbpd. The agency further forecast an average daily oil price of $28.25 per barrel (adjusted for inflation). The actual average daily price of oil traded on the New York Mercantile Exchange in 2010 was $79.61. (The IEA included in its 2000 supply projections not only crude oil plus lease condensate, which is the definition of oil, but also natural gas plant liquids--only a small fraction of which can be substituted for oil--and refinery processing gain which is the result of applying energy to break oil into its components, causing the final volume to expand. The agency refers to the resulting number as "oil" supply. But, clearly this number is not really just oil supply, and this practice continues to confuse policymakers and the public.) So, what made the IEA so sanguine about oil supply growth in the year 2000? It cited the revolution taking place in deepwater drilling technology which was expected to allow the extraction of oil supplies ample for the world's needs for decades to come. But, deepwater drilling has turned out to be more challenging than anticipated and has not produced the bounty the IEA imagined it would. This is not to say that it hasn't been a critical adjunct to world oil supplies. It's just that deepwater oil production hasn't been able both to make up for declines in production elsewhere AND grow supplies beyond that--something that has resulted in a bumpy plateau for world oil production (crude plus lease condensate) starting in 2005. Now, the IEA tells us that a "revolutionary" new technology called hydraulic fracturing--actually, a newly deployed variant called high-volume slick-water hydraulic fracturing--is going to cause what it calls a "supply shock" that spells ample and rising oil supplies. But, despite years of such drilling in the United States--which the agency says will be the center of this "shock"--world oil prices remain near alltime highs as measured by the average daily price. And, world oil production (crude


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plus lease condensate) has only occasionally bounced above 75 mbpd in the last seven years before retreating downward. Perhaps the IEA means that using these new techniques to unlock so-called light tight oil deposits beyond the United States will bring about this supply shock? Nope. The report states specifically that over the forecast period through 2018, the IEA does not expect significant development in other countries of these deposits using the new type of hydraulic fracturing. Perhaps the agency noticed the withdrawal of ExxonMobil Corp. last year from Poland. The company said it could not find commercial quantities of hydrocarbons in what had been billed as Europe's most promising shale gas deposits. Shale gas, of course, is extracted using the same fracking techniques as tight oil. And, both oil and natural gas tend to appear together in such deposits. And then, just prior to the release of the IEA's latest forecast, Talisman Energy Inc. and Marathon Oil Company pulled out of Poland as well for similar reasons. The point is not that there is no exploitable tight oil or shale gas outside the United States. Rather, the quality of those resources varies far more than the industry has led the public to believe. At first, the oil and gas industry portrayed such deposits as subject to what it called the "manufacturing model." The notion was that a company could drill anywhere within known deposits and extract commercial quantities of oil and/or natural gas. The reality is far different. Even in the United States--the center of the putative boom--drillers have ended up focusing on a few "sweet spots" that yield commercial quantities of oil or natural gas. These can represent as little at 15 percent of the total area of the formation. The IEA seems to be unaware of certain key information that is publicly available or doesn't understand the significance of that information. And, the agency doesn't seem to remember what it said in its last forecast. Here is a sampling: 

The production decline rate of hydraulically fractured tight oil wells is around 40 percent PER YEAR in the two most prolific plays, Eagle-Ford in Texas and Bakken in North Dakota. This means that drillers must replace 40 percent of last year's production capacity EACH YEAR before they can increase the overall rate of production from their tight oil wells. The average annual production decline rate for existing wells worldwide is around 4 to 5 percent. Essentially, the IEA doesn't appear to understand that it is expecting oil extracted from wells that decline at a rate 10 TIMES FASTER than average wells worldwide to make up for worldwide declines elsewhere AND provide significant growth in world oil supplies. But, the agency apparently did not look at publicly available well data from each state to determine annual decline rates and their implications for future supply. The IEA seems simply to have taken self-interested industry forecasts on their face--forecasts made with an eye toward engendering confidence among investors and lenders and thereby pumping up the value of lucrative stock options held by company insiders.


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The IEA expresses concerns about adequate infrastructure for the tight oil producers. Yet, the agency does not seem to be aware that the oil producers in the Bakken play refused to support a pipeline that would have given them their first pipeline access to major oil centers, preferring instead to rely on rail transport. Contrary to their public pronouncements, could it be that the oil producers don't really believe they have enough oil in the long term to support a pipeline and therefore did not want to make long-term shipping commitments to a pipeline company? Perhaps the oil companies would rather saddle the railroads with the capital costs of new tank cars so the oil producers won't be on the hook for any long-term infrastructure costs associated with transporting their oil. The IEA talks about a surge in U.S. natural gas production. Yet, it seems unaware that natural gas production in the United States has been flat since January 2012 even as domestic gas prices rose from $1.82 per thousand cubic feet to above $4 today. The so-called shale gas boom has ended, and we are now finding out just how costly it will be to bring that gas out of the ground. Correspondingly, the rate of extraction will not be so great as promised either. In just a few months time, the IEA has dramatically altered its view about the trajectory of world consumption of liquid fuels. Its 2012 World Energy Outlook released in November prophesied that world demand would reach 99.7 mbpd by 2035. The more recent report mentioned at the beginning of this piece, the Medium-Term Oil Market Report, now projects that world demand will reach 96.7 mbpd just five years from now, implying a growth trajectory far in excess of that projected in the agency's 2012 report. The IEA says it does not forecast prices and then tells us it uses the futures prices for its model. What its model implies is continuing high prices for oil and oil products. The IEA makes no attempt to understand the effect that high prices have on the world economy and its ability to grow under such circumstances. Nor does it address the dampening effect of high prices on demand, calling into question its projection of rapid increases in demand. The IEA then tells us that so-called oil production "capacity," the basis of which is never described, will grow faster than demand. This would imply falling prices as excess capacity overhangs the oil markets. But that would mean that the high prices which it agrees are needed to extract tight oil profitably would disappear. So, how would this allow tight oil volumes to grow dramatically if extraction is unprofitable or only marginally profitable? This contradiction is never addressed. Burning all the known reserves of fossil fuels would put us on a path to a climate catastrophe, something the IEA acknowledged in the executive summary of its 2012 World Energy Outlook saying, "No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2°C goal, unless carbon capture and storage (CCS) technology is widely deployed." CCS technology is not being widely deployed, nor is it likely to be. By contrast the agency's most recent forecast reads like a promotional brochure for the North American oil and gas industry. How does that square with the agency's concern about climate change?

It's not unusual for government-sponsored organizations such as the IEA to be given contradictory directives, in this case, to promote adequate energy supplies and also


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to warn about climate change. There has been little mention of this contraction in the media because the media has focused on what it perceives as sensational news about oil and natural gas supplies in North America. Given that focus, it is troubling that neither the agency nor the media have bothered to revisit past forecasts. It turns out such forecasts fail so often that it's puzzling that the media, governments, corporations, and the public put so much faith in them. Those whose plans were based on the IEA's 2000 forecast were completely blindsided by developments just a few years later. We would be much better served by looking at what we know right now from publicly available figures about actual trends. It's not as exciting as dramatic predictions about a future of plenty--or one miserable from want. But it's a far firmer basis for sound policy. UPDATE: Not surprisingly, it is the foreign press which is reporting signs of fatigue in the tight oil boom in America. The American media has been thoroughly bamboozled by the industry. See "US shale boom starts to fade" in the Australian publication The Age.

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Oil limits and climate change Written by Gail Tverberg from Our Finite World They say that every cloud has a silver lining. If future energy consumption (which is mostly fossil fuel) drops because of a financial collapse brought on by high oil prices and other limits, then, at least in theory, climate change should be less of a problem. One of the important variables in climate change models is the amount of carbon dioxide from the burning of fossil fuels that enters the atmosphere. In a recent post (Peak Oil Demand is Already a Huge Problem), I showed the following estimate of future energy consumption. Figure 1. One view of future energy consumption for the world as a whole. History is based on BP’s 2012 Statistical Review of World Energy.

I explained in that post that oil limits are different from what most people expect. Oil limits are price limits. Indirectly because of these price limits, fuel consumption of all sorts (not just oil) will decline in the near future. The problem will be greater job loss and aninability to afford products of many kinds, including those made with fossil fuels. Financial collapse, particularly of governments, and a long-term decline in population are also part of this scenario. My estimate of CO2 generation by fossil fuels in the 21st century is only about onequarter of the amount (range midpoint) assumed in the 2007 Intergovernmental Panel on Climate Change (IPCC) Report. When differences in estimates of an important variable are this far apart, one starts reaching the “Garbage in, garbage out” problem. This is a persistent problem for all modelers. Even if the climate model is perfect apart from its estimate of future CO2 fossil fuel use, and even if anthropogenic issues are implicated as a cause of recent climate changes, the model with its incorrect estimate of future fossil fuel energy consumption can still be unhelpful for determining needed future actions. A comparison of energy consumption estimates is shown in Figure 2. My estimate of energy consumption (similar to that in Figure 1) is shown as the Collapse scenario.


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Figure 2. Comparison of Energy Consumption Estimates. Climate high and Climate low are based on Figure 1 of this Oil Drum post by DeSousa and Mearns. “Peak oil” is based on a 2013 estimate by Energy Watch Group. Collapse is my estimate, associated with Figure 1 of this post. In all of the estimates, there is an implicit assumption that the fuel mix stays relatively constant.

Figure 2 Explanation The Collapse Scenario in Figure 2 is my estimate of future energy consumption, using amounts similar to Figure 1 of this post. It is based on the assumption that financial limits are what brings down the system. As the system is brought down, our capability to provide many basic services, such as our ability to maintain roads and electric transmission lines, disappears. Thus, we become unable to maintain the complex systems needed to extract oil and gas and coal, and because of this, are unable to maintain current energy supplies. Even renewables will become a problem, because we need fossil fuels to create new renewable energy generation. We also need fossil fuels to maintain the lines used to transmit the electricity, and to provide back-up generation. If the problem we are facing is financial collapse, biomass can be expected to behave differently than other renewable energy resources. If people are poorer, there will be great demand for wood for heating, and perhaps for creating metals and glass. In fact, there is evidence that Greece is turning to wood burning already. (Greece is an early example of a country approaching the financial problems we expect world wide.) Thus, under the Collapse Scenario, a likely problem is deforestation. The Peak Oil Scenario shown in Figure 2 is based on a 2013 estimate by the Energy Watch Group. The assumption in estimates using “Peak Oil” ways of evaluating supplies is that geological constraints determine supply. The question of price doesn’t come into the analysis; instead curve fitting techniques are used. If oil supplies decline, the assumption is made that natural gas and coal extraction will to some extent rise to offset the oil decline. Many who support the peak oil method of calculating expected availability of future fuel supplies are advocates of a ramp-up of wind and solar PV. One reason use of these resources is supported is because fossil fuels are seen to be limited, and renewables might act as “fossil fuel extenders”. I personally am concerned about adding intermittent renewables to the grid in large quantities. Doing so is likely to shorten the lifespan of the grid, if the intermittent renewables introduce greater cost and complexity. I believe that peak oil estimates are overstated because they do not consider the


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economics of depleting fossil fuel supplies. Oil consumption by importers starts to decline if price is high–something that happens long before world oil supply actually starts to decline. James Hamilton has shown that 10 out of 11 US recessions since World War II were associated with oil price spikes. (Recession tends to lead to less consumption of many products, including oil.) At the same time, oil exporters need high prices, and have financial problems if price or production declines too much. If exporters do not get enough revenue from oil exports, some of them collapse. See my post How Oil Exporters Reach Financial Collapse. The Climate High and Climate Low estimates are based on carbon amounts shown in Figure 1 of this 2008 Oil Drum post by De Sousa and Mearns. In converting these carbon estimates to energy consumption estimates, I implicitly assumed that the carbon intensity of energy use would remain unchanged–that is, improvements resulting from more use of natural gas and renewables use would be offset by increases in coal consumption. This assumption is probably not what the IPCC would make. Their “Low Estimate” would probably assume greater use of renewables and natural gas than their High Estimate, so that the actual energy available in their Low Estimate would be closer to the energy available in their High Estimate than what my graph would suggest. The 2007 IPCC report does not give much detail, except to generally discuss their reasoning. The IPCC’s basic assumptions seem to be: 1. Demand is the basic determiner of supply. In the view of the IPCC, there is lots of oil, gas, and coal in the ground (see Figure 4.2 of Working Group III Report). It is assumed that we can get these fuels out, essentially as fast as we want. No consideration is given of diminishing returns, and the resulting likely run-up in both needed investment funds and price to the user. (See Our Investment Sinkhole Problem.) 2. Because the IPCC report misses the issue of diminishing returns and resulting higher price, it assumes that demand can keep on ramping up pretty much indefinitely. In the real word, demand is what customers can afford to buy. This is already declining for the US, Europe and Japan, with the high oil prices experienced in recent years. Figure 3. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

Overview of IPCC 2007 Report As I see it, there are three important aspects of the 2007 IPCC analysis:


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1. The Climate Model. This is the part of the report that says, if CO2 is such and such, and other forcings are so much, the effect on the climate is this amount. I personally do not have expertise to evaluate this part of the report. I note, however, that at least some climate scientists seem to be back-pedalling on how much impact is expected from a given amount of carbon. A letter published in Nature Geoscience on May 19, 2013, titled Energy Budget Constraints on Climate Response indicates that the climate effects of a given set of forcings seems to be lower than the 2007 IPCC report suggested. This letter, together with explanatory information is available free for download, with registration. 2. The Estimates of Fossil Fuels going into the Model. It is this part of the model that seems to be seriously in error. The carbon added during the 21st century in the Collapse Scenario is only about 25% of what the IPCC estimates use (averaging the high and low) . De Sousa and Mearns calculate that their Peak Oil estimates would keep CO2 emissions below 450 parts per million. My Collapse Scenario estimates are considerably below De Sousa and Mearn’s Peak Oil estimates, so would in theory produce lower yet CO2 impacts. 3. What to Do About the Problem. I think this part of IPCC report has a serious problem as well. The report, as it is published, is not about How to Reduce CO2 Emissions.If this had been the goal, the report would likely have talked about reducing population, eating less meat, making manufactured goods that last longer, and standardizing goods, so that it is not necessary to buy new goods, just replacement parts. Instead, the IPCC 2007 report provides a wish list of ways we might keep Business as Usual (BAU) going, using techniques that might reduce fossil fuel use with little pain to the business community and consumers. A big part of the problem with the analysis of what to do about the problem is that the researchers putting together the analysis do not understand the way the current system works. According to Newton’s Third Law of Motion, “For every action, there is an equal and opposite reaction.” Unfortunately, there is something very similar when one tries to make energy substitutions. A researcher might assume that substitution of higher-priced renewable energy for lower-priced fossil fuel energy would reduce world carbon emissions, but this is true only if second and third order effects don’t undo the supposed benefit. Higher-priced fuels make a country less competitive in the world marketplace, and give an advantage to countries using coal for their generation. Adding a carbon tax has similar unplanned effects. Figure 4. Actual world carbon dioxide emissions from fossil fuels, as shown in BP’s 2012 Statistical Review of World Energy. Fitted line is expected trend in emissions, based on actual trend in emissions from 1987-1997, equal to about 1.0% per year.


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When we look at actual CO2 emissions, we find that they have risen remarkably since the Kyoto Protocol was ratified in 1997 (Figure 3, above). (See my posts, Twelve Reasons Why Globalization is a Huge Problem and Climate Change: The Standard Fixes Don’t Work.) One of the implicit assumptions in the IPCC report is that continued growth in a finite world makes sense, and can be expected to continue until 2100. In fact, we are reaching limits of many kinds. Figure 5. Various types of limits we are now reaching

In fact, modelers should be considering all of the limits simultaneously. Modeling any one limit on Figure 5 by itself will produce results that will suggest that that limit is a huge problem, that perhaps can be fixed. To a significant extent, there are workarounds for many of these problems, including more research on antibiotics, desalination of water, and intermittent renewables to substitute for some fossil fuels. The problem with each of these workarounds is that they all involve higher cost, and thus tend to create financial problems, especially for governments that try to fix the problems. Thus, the real issue is a likely near-term financial problem. This financial problem can be expected to lead to economic shrinkage which will by itself help mitigate several of the problems, including climate change. Given the multiple limits we are reaching, I think we need to step back. Energy is truly needed to create products and services of all kinds. The IPCC is claiming that with a few tweaks, economic growth of the type we have grown to expect can continue until the year 2100. This assertion is clearly false, with or without the tweaks they are advocating. We need to be figuring out how to live with a world that is rapidly changing for the worse, in terms of energy availability. I am not sure climate change should be our Number 1 concern, because the CO2 part of the problem is likely to mostly take care of itself. Instead, we need to be looking at how we can make the best use possible of energy sources we have. We also need to be cutting back on the real source of demand–population growth. Perhaps we need to be thinking about different options than we have been thinking about to date–for example, making supply chains shorter and bringing production closer to the end-user. We might want to make such a change in an attempt to


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sustain production for longer, whether or not this has an adverse CO2 effect, viewed from today’s peculiar perspective: Only manufacturing which results in local CO2 production seems to be viewed as “bad;” exporting coal to China, or importing goods manufactured using coal from China/ India is not viewed as a problem. Having economists with a mindset of BAU forever and helping businesses get ahead, doesn’t necessarily produce the best results from the point of view of taking care of the existing population. Perhaps we should be looking at our current problems from a broader perspective than the IPCC report suggests.

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Recent Company Profiles The OilVoice database has a diverse selection of company profiles, covering new start-up companies through to multi-national groups. Each of these profiles feature key data that allows users to focus on specific information or a full company report that can be accessed online or printed and reviewed later. Start your search today! IPB Petroleum Oil & Gas IPB Petroleum is an Australian oil and gas exploration company. IPB has built a strategic position in the oil-prone southern margin of the Browse Basin Offshore North Western Australia. IPB Petroleum's OilVoice profile

Acorn Energy Service Acorn Energy, Inc. provides technology driven solutions for energy infrastructure asset management worldwide Acorn Energy's OilVoice profile

Spyglass Resources Oil & Gas Spyglass Resources Corp. is a dividend paying, intermediate oil & gas company headquartered in Calgary, Alberta that trades on the TSX under the symbol “SGL”. Spyglass currently operates oil and natural gas properties in Alberta, Saskatchewan and British Columbia. Spyglass Resources' OilVoice profile

PetroTech Oil and Gas Oil & Gas PetroTech Oil and Gas, Inc. is a recognized leader in our industry. Our Company was developed in a world where new technologies and global markets have changed the equation for profits in one of the world’s most lucrative industries. PetroTech Oil and Gas' OilVoice profile

Norstra Energy Corporation Oil & Gas Norstra Energy Corporation is a Texas and Montana based oil and natural gas exploration company focusing exploration efforts in the under-exploited southern portion of the Bakken-Alberta Fairway in the central portion of western Montana. Through a continuously growing team of seasoned oil-patch technical experts, energy entrepreneurs and energy project finance experts, Norstra looks to rapidly and methodically grow into a meaningful oil producer. With lease rates in the Alberta Fairway not yet feeling the inflationary pressures of the eastern Bakken and Williston basins, but exhibiting the same superb economics, Norstra's business plan will consist of drilling high probability wells within this up-and-coming area, with the goal of consistently increasing shareholder value. Norstra Energy Corporation’s OilVoice profile

Homeland Resources Oil & Gas Homeland Resources is a production and exploration company focused on producing onshore oil and gas in the United States. Homeland Resources is focused on locating and producing oil and natural gas resources to realize the financial benefits this strategy represents, and thereby provide value to its shareholders. Homeland Resources’ OilVoice profile


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Fracking boom is doom for overpriced oil Written by Andrew McKillop from AMK CONSULT DAWNING REALIZATION The perception of what the shale energy boom, starting in the US but rapidly going global, means for world energy - and especially for overpriced oil - has been slow but is now coming. This week's shale energy forecasts by the International Energy Agency, in its Medium-Term Oil Market Report of 14 May spells out what was clear as early as 2009-2010. US and global shale gas and shale oil development, and the massive reserves of global stranded gas discovered since 2009, mean that energy scarcity is finished. With it, oil at $100 a barrel is also finished. 'North America has set off a supply shock that is sending ripples throughout the world,' The IEA director Maria van der Hoven said when launching the report at the Platts oil-sector Crude Oil Summit in London, adding: 'The good news is that this is helping to ease a market that was relatively tight for several years". She went on say the technology that unlocked the bonanza in US states including Texas, North Dakota and Louisiana can and will be applied worldwide, leading to what she called "a broad reassessment of (energy) reserves". At the summit she also said Emerging economies will become the leading players in the refining and global oil demand sectors, making it certain there will be losers also, as overstretched "historic major" oil corporations like Exxon Mobil, BP, Shell, Total and ENI race to develop shale gas, huge new world reserves of stranded gas, and shale oil reserves while trying to maintain margins on downstream refining and distribution. This comes on the back of a decade in which oil prices, like gold, seemed able to defy gravity and always climb, in turn enabling oil companies and exporter countries to lever huge loans and cheap credit facilities for further expansion. The supply shock created by surging US and Canadian shale and tarsand oil supply will be as transformative for oil markets through 2013-2018 as the surge of Chinese oil demand was through 2000-2010, the IEA's director also said. The shift will not only cause oil companies to overhaul their global investment strategies as lenders become less tolerant of high-cost producers, but will also reshape the way oil is transported, stored and refined. According to the IEA, the effects of continued growth in North American oil supply led by US light, low-sulphur "tight shale" oil and Canadian oil sands will cascade


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through the global oil market. While the IEA cautions in its report that shale oil development, rather than shale gas expansion, outside North America may not be a large-scale reality before the 2018 horizon, the same "fracking" and related technologies responsible for the North American gas and oil output boom will increase production from mature, conventional oil fields in established producer regions - causing companies and lenders to reconsider investments in higher-risk areas. NEW OPPORTUNITIES - NEW RISKS ALSO The IEA report gave details of how much, and how fast world oil and energy is changing. Today, in virtually every refining and demand segment or aspect of the market, the nonOECD developing economies are in the driver's seat. The report showed that the previous paradigm of world oil demand, with the OECD groups of countries historically taking at least 50% of all global supply, is now over. In 2013, for the first time, non-OECD G20 Emerging conomies will overtake OECD nations in oil demand. This reinforces the OECD's loss of dominance relative to the Rest of World, with the OECD group losing its primacy for oil demand, over 5 years back, in 2007. At the same time, massive refinery capacity increases in non-OECD economies are accelerating a broad restructuring of the global refining industry and oil trading patterns, with upstream refining increasingly impacted by rising condensate gasbased activity using light, low-sulphur feedstock. Increasing US product exports and output from the new Asian and Middle Eastern refining titans will generate a steep growth in non-OECD refining capacity and accelerate the transformation of the global product supply chain. Worldwide, this will exert downward pressure on refining margins and refined product prices leaving OECD refineries. firstly in Europe, at risk of closure. While OPEC will remain the key "supplier of last resort" in the oil mix, OPEC production capacity growth will be adversely affected by growing nonOPEC global supply, by growing insecurity in Maghreb countries and Nigeria, and by national financial and oil sector borrowing constraints. OPEC total production capacity is expected by the IEA to increase about 1.75 Mbd and reach 36.75 Mbd in 2013 with growth led by Iraq, Saudi Arabia and UAE, but OPEC demand forecasts for its oil on global export markets is at best one-half of the 1.75 Mbd capacity addition. US shale oil output growth in 2013 is expected to be about 0.9 Mbd after 0.8 Mbd increase in 2012. Taking only these two components of world oil supply, combined OPEC and US capacity growth in 2013 will be about 2.65 Mbd. IEA and OPEC Secretariat forecasts of world oil demand trends set likely world growth in 2013 at 0.8 Mbd or less. The outlook for oil prices is very clear! Certainly to 2015, the IEA forecasts world oil production capacity rising at more than 2 times world oil demand growth rates each year, with refining capacity growing at least as fast. However what makes the shale or "tight oil" boom truly transformative itself, and even more so when linked with shale and stranded gas development raising the supply of condensate gas feedstock for refining, is not just the sheer production volumes that are coming. The new crude is distinctively light, clean and


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high quality, unlike an increasing amount of overpriced, heavy, dirty, high sulphur crude supplied by OPEC producers and Russia. The impact of the shale energy boom extends from the unconventional nature of both the geological plays from which it is extracted, and the technologies which unlock it, to the economic and market impacts of the new production and the chain reaction it is creating in world transport, storage and refining infrastructures. For the "old suppliers', including OPEC and Russia their strategy options are clear. In Russia's case, allied to Qatar, Norway and Algeria the refusal of Gazprom to cut gas export prices to Europe until forced to do so is a signal showing that "rearguard action', that is is supply cuts could be used to try denying the new global oil situation. This action, propping oil prices for as long as possible, will surely only raise the political support to shale energy, among present oil and gas importer countries, even further and in certain cases - especially Europe - sweep away current "environmentalist and green" bans on developing domestic shale energy maintaining import dependence on Russia and Arab suppliers. RUNAWAY CHANGE Unexpected change, at least unexpectedly fast change across the global energy supply-demand space is only now beginning to be understood for what it means. Global oil supply is growing at sustained but unexpected high rates. Growth rates of oil demand have shrunk in the Emerging economies by as much as 50% since 2010, the US struggles to recoup 2007 rates of oil demand, and the European Union's 27 member states are in their seventh straight year of oil demand contraction. The world today does not lack liquid hydrocarbon resources, or other hydrocarbon fuels, or non-hydrocarbon energy. The problem is economic -- the inability of the Old World OECD to compete in a global economy based on using all kinds and types of what will certainly and surely become cheaper energy, ironically starting with cheap coal. Coal demand has declined so fast in the US due to cheap cleaner-burning shale gas for power production, that US exports of cheap coal are increasing at double digit annual rates. China's massive appetite for coal - using close to 50% of all coal mined in the world - has since 2012 been capped by the all-powerful National Reform and Development Commission, but world coalmining and shipping capacity continues growing. Cheap coal, also ironically, was the basis of the Old World's economic takeoff and prosperity from the late 19th century, and remains the energybase of the Chinese and Indian economies. The old paradigm in Western economic manuals and theories was that cheap energy in the shape of coal fuel enabled economic growth and higher standards of living. This paradigm morphed to cheap oil from the 1950s but was routed by the 1970s oil shocks and the ecology-environment and green energy movements, which since year 2000 have morphed into the anti-Global Warming movement. Both of these movements (green energy, global warming) are predicated on high or very high energy prices, but the general policy of high or very high energy prices - energy of all kinds - is firstly unrealistic given new unconventional oil and gas resources, and unrelated to the real and basic economic problem. Attempts to rig commodity markets - to keep oil prices high - now that attempts at


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keeping natural gas and coal prices high have been abandoned, firstly in the US, are so striking and clear they are impossible to deny. Propping oil prices a little longer at the "magic" symbolic $100 per barrel level, however serves no role except rearguard action to protect vested interests. The new energy-and-finance paradigm is a future of declining oil and energy prices to levels which can heavily and adversely affect public finances of the 20 to 30 major oil exporting nations, and the financing of major energy corporations. The longer that certain change is denied, the worse will be the adjustment crisis.

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Insight: The Challenger! Written by David Bamford from Finding Petroleum Did any of you watch the film about Richard Feynman's work on the Shuttle "Challenger" disaster of the 1980's, starring William Hurt? It was on TV recently; I knew before about his demonstration of the brittleness of the O-ring seals at low temperatures by dropping them into a jug of iced water (simulating the overnight conditions at the launch site) but I had forgotten the fact he had dug out of NASA the fact that when all the risks to shuttle launches and missions were considered, the 'chance of success' was thought to be somewhere just over 96%, in contrast to the 99.several 9's% that was NASA's official position. This moved the chances of a Challenger-type disaster from one every few thousand years to more like one every few years, considering the number of missions that were planned per year. Why has this got anything to do with the oil & gas industry? Well, much discussed after the Deepwater Horizon tragedy of 2010 has been the socalled 'Swiss Cheese' model of risk management in which a system is considered analogous to a stack of slices of Swiss cheese. The holes are opportunities for a


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failure or accident to occur, and each of the slices are layers of the system. A 'problem' may pass through a hole in one layer, but in the next layer the holes are in different places, and the problem may be stopped. Each layer is a defense against potential problems. For a catastrophic failure or accident to occur, all the holes need to align, for each step in the process, allowing all defences to be defeated and resulting in a failure.

An example of such a 'Swiss Cheese' model is found in BP's Deepwater Horizon: Accident Investigation Report, from September 8, 2010. To repeat, in this model, an organization's defences against failure are envisaged as a series of barriers, with individual weaknesses in individual parts of the system, and are continually varying in size and position. The system as a whole produces failures when all individual barrier weaknesses align, permitting "a trajectory of accident opportunity", so that a hazard passes through all of the holes in all of the defenses, leading to a failure. What is interesting is that when a drawing of the model is shown, typically the holes are small compared with the total surface area of the barrier. An RAF 'acquaintance' of mine (my friends will know who I mean!) said, of their experience - 'how do you know how big the holes are?' An interesting question! Let's pick - not quite at random - five technology aspects of a deep water rig's defences, five technology 'barriers':


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1. Cement jobs: it has been reported that cement jobs, especially at high temperatures and/or pressures fail from time to time. How often? 1 time in 5; 1 time in 10; 1 time in 100? 2. Cement bond logs: it has been reported that they fail from time to time? How often? 20% of the time or 1%? 3. Negative pressure tests: it has been reported that they are sometimes difficult to interpret? How often? Half the time; once in a hundred times? 4. Acoustic triggers for Blow Out Preventers (BOPs): the US MMS did not make them mandatory apparently because sometimes they were believed not to work in muddy or polluted water. How often does this occur? Once in a thousand, once in a hundred, or once in ten, times? 5. How often do the shear rams on BOPs fail to cut drill pipe? Once in a thousand times, once in a hundred? I point out without hesitation that I have no idea of the right answers to any of these questions; I have simply quoted a wide range in each case because this range speaks to 'the size of the hole(s)' in a particular barrier? If the failure rates of each of these technologies - and all the others involved - are such that a hole appears like a 'pin prick' in an extensive background, one might conclude that the chances of every hole aligning are very small and the chance of catastrophic failure correspondingly so. Equally, relatively large holes - significantly high technology failure rates - would lead to the opposite conclusion. Technology providers tell us of the virtues of their offerings - but do we know how often they don't work? I only ask because I would like to know!

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Review: The Bight Basin: From regional context to licence block evaluation Written by Ed Collins from Neftex Shared Earth Models provide the foundations for the continuous capture of data and knowledge within exploration and production workflows. The delivery of 3D plate-scale geological models developed as part of the Neftex Earth Model unlocks limitless potential for integrating proprietary industry data into regional geological frameworks and the rapid analytical basin screening and assessment of play opportunities in the subsurface environment. By combining conventional asset-scale 3D modelling approaches with a unique method of visualising deep time, we can investigate the evolving petroleum systems of a plate-scale area using a number of techniques and carry out rapid basin screening methods. Whether it be compiling coarse clastic depositional maps for the Phanerozoic evolution of an entire region at the click of a button or instantly highlighting reservoir-seal pairs for the complete sedimentary package of a basin, we explore regional Australia and New Zealand 3D geocellular model displayed in four dimensions as dynamic and evolving tools as opposed to their conventional static and unwieldy counterparts. We can compare preservation versus deposition and the ease at which proprietary datasets such as petroleum systems data can be integrated into screening workflows is demonstrated in an analysis of source rock potential. The importance of effectively managing large, disparate regional datasets and executing efficient and consistent workflows is highlighted in this introduction to 3D and 4D Shared Earth Models as a tool for Basin Screening. When regions can be identified for further investigation at a more refined scale, interpretations and data from the same shared description of the subsurface can be used to populate a more detailed framework in depth by integrating seismic data and other depth constraints. In doing so, the regionally coherent geological understanding is preserved in assessing risk at the play to prospect level. With that in mind and having high graded regions within the Australia and New Zealand region, the Bight Basin becomes a favourable target for further investigation. The Basin has had limited exploration to date, however has been exposed to a substantial seismic acquisition programme, which due to current Australian


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Legislation is in the public domain. This provides a framework for the Neftex Exploration Cube workflows to be implemented, creating a depth grid which captures the Neftex Sequence Stratigraphic Model and its associated mapped facies on a regional scale. The tectonic evolution of the Bight Basin, particularly the Ceduna Sub Basin, has led to an un-proven yet highly prospective petroleum system. The understanding of this system is greatly enhanced when using 3D visualisation tools, particularly when combined with a regional sequence stratigraphic framework. Through workflows developed in house, and accessible through the Petrel platform, the user is able to asses likely maturity profiles, reservoir charge and accumulation as well as seal presence in the basinwide area of interest, thus substantially reducing risk on potential prospects. The generation of the Exploration Cube gives the user the ability to interrogate and analyse both the potential petroleum systems, but also the potential risk on plays and fairways within the area of interest as a first pass assessment of the exploration potential.

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Oil rides with the asset bubble - but not forever Written by Andrew McKillop from AMK CONSULT BUBBLE TROUBLE Indicators as wide-ranging as real-versus-official inflation indexes, T-bond fundamentals against daytrade technicals and all major stock markets hitting the roof have a faithful tracker in the paper oil asset boom. For many, the orgy of central bank "easing" is a prime mover of this megatrend, and the attitude of central bankers can be gleaned by the comment, reported by Reuters May 13, from the head of Italy's central bank, Ignazio Visco, who is also a policymaker of the European Central Bank. Visco suggests that the ECB could cut its deposit rate below zero, effectively charging banks for parking any spare cash they do not lend. Although paper gold has now wilted, with plenty of help from market manipulators oil has temporarily, only temporarily gone the other way. As the chart below shows, for 2008-2009, things can dramatically change in an eyeblink


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First we can note that the oil price compression from the 1979 peak took 7 full years, to 1986, to fall by the same percentage amount it lost in only six months in 20082009. In nominal terms, we had a fall from over $125 a barrel for both WTI and Brent in June 2008, to just above $30 in February 2009, then a rebound to over $100 a barrel in April 2011. PETRODOLLAR WAR This is a longstanding theory, holding that a major driving force of US foreign policy is the status of the dollar as the world's dominant reserve currency - and the currency in which oil is priced. The term "petrodollar" was coined by William R. Clark. His theory, developed by many other authors and analysts is that because most major developed countries rely on oil imports, they are forced to hold large stockpiles of dollars in order to continue importing oil. This creates consistent demand for dollars, and prevents the dollar from losing its relative international monetary value, regardless of what happens to the US economy. Continuing with this more than 35year-old theory, this also allows the US to issue bonds at lower interest rates than it would otherwise be able to. The now-outdated, we could say outclassed-by-reality theory also says that due to the petrodollar system, the US government can run higher budget and trade deficits for longer than almost any other country. This can be compared with Bank of Japan action and ECB action, as well as national budget deficits as a percentage of GDP in other developed countries, today.

Almost never considered by authors working the petrodollar warfare lode, notably concerning US relations with Iran, Venezuela and Russia, there are only two drivers for artificial dollar demand due to the petrodollar system. Firstly global oil import demand and the oil price have to hold up, and secondly, foreign nations who had formerly found it beneficial to hold dollars to pay for oil need to continue holding dollars even if their oil imports decline and-or oil prices decline. The "currency war" variant of the petrodollar system theory, holding that a shift to notably euros or gold for oil payments would undermine the system, is unrealistic when given any serious analysis. Whenever these conditions change - oil prices down and declining oil imports by major countries - the dollars that are no longer needed will return, in massive amounts back to their country of origin, the USA. The consequences would be - or rather will be - dramatic.


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CHANGE IS VENGEFUL From the dawn of the petroleum age to its accelerating twilight, today, geopolitical strategies concocted by developed nations featured the maintenance of easy access to world oil supplies. This was conceived and believed to be a win-win strategy for developed nation policy makers, and especially for US policy makers. From the 1970s and the first Oil Shock of 1973-1974, the only "morph' in this policy and strategy was to substitute expensive oil, for cheap oil. For the USA's ability to run deficits and the Petrodollar System, much higher oil prices were a major gain, not a loss. Previously, only the truly naive could deny the economic and political incentives for ensuring national access to cheap oil supplies, or could imagine that the petrodollar system as a monetary and finance tool, unrelated to the economy, works better with higher oil prices. Understanding the petrodollar system helps make sense of the hundreds of US military bases stationed in over 130 countries. Maintaining an empire depending on "dollars for oil" is no cheap task, but was maintained for as long as it was possible to believe, increasingly naively, that oil was only able to be produced outside the US, Canada, and other "friendly countries", and that new oil discoveries would be almost exclusively made in "anti-Western" countries always exercizing the threat of nationalizing oil reserves and supplies, and at least as important, scheming to challenge and replace the "petrodollar system". The combined costs of the Afghan and Iraq wars for the US are of course controversial, like the interpretation of these wars as being "oil wars", but many analysts like Joseph Stiglitz and Linda Bilmes put the total cost at above $4 trillion. This can be compared with the annual cost of US oil imports - now declining on a year-in year-out basis as domestic shale oil output ramps up, and US oil demand stagnates. The real role and size of "The Prize" in Central Asia can be appreciated from this CIA table:

To be sure, it is more than unlikely that politicians such as Barack Obama will stand up and admit that "the oil imperative" in the Middle East and Central Asia was exaggerated, or wrongly interpreted and is now outdated and irrelevant to US energy independence and emerging economic and socioeconomic realities in the US, as in other developed countries. With the major and massive changes for oil resource availability revealed by the shale energy revolution, rising global oil production capabilities, stagnating oil


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demand in all major developed countries, and the declining role of oil in the economy, the Petrodollar System's days are numbered, like the notion that $100-oil prices are "normal". The impact of this will be massive.

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Insight: Fragile AIM! Written by David Bamford from Finding Petroleum Are AIM oil & gas companies inherently fragile? In their review of the performance of small-mid cap oil & gas companies – which you can find here – Richmond Energy Partners have highlighted that the fact that for most investors in AIM oil & gas companies, their investments have been under water since 2008. Why are the majority of such companies ‘fragile’? Firstly, they have faced headwinds that are outside their control – the downturn in the global economy, uncertainty about oil & gas prices, negative investor sentiment almost everywhere you turn. Secondly, they have been torpedoed by their own lack of execution whether we are talking about a ‘mature fields’ company not delivering promised reserves and production from late-life fields that they have acquired or an ‘exploration-led company’ not delivering promised discoveries and resources from thinner than expected portfolios. What are the characteristics of ‘robust’ or ‘resilient’ companies? 1. My observation is that the first step is to have a long list of possible options, of things the company might do; 2. and then to rank them;


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3. and then only execute the top portion – the top quartile, the top quintile, even better the top decile. This has two effects: 1. One outcome of exercising this “quality through choice” is that the success rate increases. 2. Even so, the success rate will not be 100% but the second outcome is that executing several options allows a ‘portfolio effect’ to kick in – the successes outweigh, can carry, the failures. The flip side of these thoughts is that a company will be ‘fragile’ if it depends on being lucky with a single field, a single basin, a single play – there have even been one or two companies that have taken ‘pot luck’ with a single prospect! In using the terms ‘fragile’ and ‘robust/resilient’, you may be aware that I am nodding in the direction of Antifragile: Things That Gain From Disorder, a fascinating book by Nassim Nicholas Taleb published in November 2012 by Random House in the USA and Penguin in the UK. In his introduction to the book, the author sets out his stall as follows: "Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder, and stressors and love adventure, risk, and uncertainty. Yet, in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragilegets better." Though I can recall a few things that benefited from volatility – for example ‘deals’ that turned out well because the oil or gas price shot up or some well known field development projects that were rescued by rapidly escalating oil prices, I have to admit that I have not got my head around how an AIM company can be antifragile!

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Russia & the FSU - plenty of opportunities below ground, plenty of problems above ground! London, 18 Jun 2013 Exploiting deep water fields ....it's not as easy as explorers think! London, 19 Sep 2013 Exploring internationally for unconventional oil and gas .......finding the "sweet spots" London, 02 Oct 2013 Finding petroleum in the South Atlantic ...if there's any left to find! London, 05 Nov 2013 New technologies for describing and monitoring reservoirs get to know your reservoir better! London, 26 Nov 2013


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Why the renewable energy industry ought to support U.S. natural gas exports Written by Kurt Cobb from Resource Insights U.S.-based industries and utilities that consume a lot of natural gas have been trying to figure out just how to respond to proposals in Congress to allow expanded natural gas exports, a move that could significantly raise the price of one of their chief inputs. But, there is one segment of U.S. industry that ought to be cheering for such an outcome--though I doubt that its leaders will be offering their support in anything above a whisper. The renewable energy industry would benefit from higher natural gas prices--and higher coal prices, for that matter--since, as these fuels for electric power plants become dearer, renewable energy sources become more competitive. The costs for renewables are in the production and installation of the solar panels, wind towers and dams; the fuels--sunlight, wind, and water--are essentially free. But it would seem almost unpatriotic to cheer for higher energy prices in America. Higher prices--all things being equal--tend to depress economic activity. And, higher energy prices also tend to make American goods less competitive on world markets by increasing the costs of many inputs. Hence, my observation that the titans of the renewable energy industry will probably stay largely mum in the fight over expanded exports of U.S. natural gas. But there are good reasons for the American public to shoulder the burden of higher energy prices now to help build a more secure future. First, climate change is already on course to destroy the way of life that Americans say they want to preserve. Second, there is no chance, NONE, that fossil fuels can sustain American society and the world in the long run. Only renewable energy can offer the promise of essentially perpetual supplies. This second reason tells us that we must make an energy transition at some point. And, given the uncertainties about fossil fuel supplies and the wars and conflicts they engender, it would be wise to make that transition as soon as possible. In addition, history has shown us that energy transitions can take two generations. No one can say for certain whether fossil fuel supplies can continue to grow or even remain stable for 50 years to see us through such a transition. And, we will need to use fossil fuels to build the renewable energy economy. If we use them instead simply to have one last energy orgy, there may not be enough left to build the renewable


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energy infrastructure needed to replace them. But the first reason, climate change, tells us that we must embark on the needed energy transition now. We cannot wait to see how things turn out. The melting of sea ice and the tundra tells us that time is up. Extreme droughts and floods--predicted by climate models--have already arrived and are the cause of soaring food prices and extensive property damage. Since the effects of warming lag by about 40 years-because the oceans take so long to warm--we are only seeing the effects of greenhouse gas emissions through the early 1970s. Even if we stopped emitting all greenhouse gases today, we'd still have 40 or so more years of warming ahead of us. The best and most precise way to encourage energy conservation and a renewable energy buildout would be a steadily rising carbon tax. But, in the absense of sensible energy policy, it might now be time for those concerned about the ongoing delay in building the renewable energy economy to embrace world prices for all energy here in the United States. Coal and oil already trade at world prices in the United States since they can be shipped to the highest bidder worldwide. (Even though crude oil exports from the United States are restricted, we produce far less than we consume and the effect is the same as if we had no restrictions.) Natural gas is essentially trapped on the North American continent because there are currently no operating export terminals that can liquefy the gas for transport by special liquefied natural gas carriers. Some export terminals are planned, however, and one is actually being built now in Louisiana. There will be a fierce battle fought over just how much natural gas should be allowed to leave the United States for more profitable markets in Europe and Asia. And, that battle might be fought against the backdrop of rising prices as current wells deplete rapidly without adequate drilling to replace them. Some will say that rising natural gas prices will cause utilities to switch back to coal. But, a switch back to coal en masse by utilities seems unlikely given the emerging regulation on greenhouse gas emissions. Instead, utilities are increasingly likely to favor renewables to help them to comply with those regulations. In whatever manner higher prices are achieved, they will be better for America in the long run since they will hasten the day when the country can say goodbye to fossil fuels as its main energy source and reroute them to more valuable and critical purposes. Those include making fertilizers, pharmaceuticals, fabrics, industrial chemicals, and plastics of all kinds, all of which are far better uses of oil and natural gas than simply burning them and wrecking the climate in the bargain.

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Reaching oil limits New paradigms are needed Written by Gail Tverberg from Our Finite World I have written in recent posts that oil limits are more complex than what many have imagined. They aren’t just a lack of a liquid fuel; they are inability to compete in a global economy that is based on use of cheaper fuel (coal) and a lower standard of living. Oil prices that are too low for oil exporting nations are a problem, just as oil prices that are too high are a problem for oil importing nations. Debt limits are also closely tied to oil supply limits. It is actually debt limits, such as those we seem to be reaching right now, that may bring the whole system to a screeching stop. (See my posts How Resource Limits Lead to Financial Collapse, How Oil Exporters Reach Financial Collapse, Peak Oil Demand is Already a Huge Problem, and Low Oil Prices Lead to Economic Peak Oil.) We have many Main Street Media (MSM) paradigms that mischaracterize our current predicament. But we also have what I would call Green paradigms, that aren’t really right either, because they don’t recognize the true state of our predicament. What we need now is new set of paradigms. Let’s look at a few common beliefs. Inadequate Oil Supply Paradigm As I stated above, indications that oil supply is a problem are confusing. MSM seems to believe, “If the US can be oil independent, our oil supply problems are solved.” If a person believes the goofy models our economists have put together, this is perhaps true, but this is not true in the real world. Without a huge, huge increase in US oil production (far more than is being proposed),being “oil independent” simply means that we are unable to compete in the world market for buying oil exports. US oil consumption ends up dropping, and we end up on the edge of recession, or actually in recession. Oil exports instead go to the countries that have lower manufacturing costs (that is, use oil more sparingly). See Figure 1 below. In fact, even some of the oil products that are created by US refineries end up going to users in other countries, because it is businesses in other countries that are making many of today’s goods, and it is these businesses and the workers they hire who can afford to buy products like gasoline for their cars or diesel for their irrigation pumps.


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Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.

The Green version of this paradigm seems to be, “If world oil supply is rising, everything is fine.” This is related to the idea that our problem is “peak oil” production caused by geological depletion, and if we haven’t hit peak oil production, everything is more or less OK. In fact, the limit we are reaching is an economic limit, that comes far before world oil supply begins to decline for geological reasons. See my post, Low Oil Prices Lead to Economic Peak Oil. The real paradigm is, “Limited oil supply leads to financial collapse.” This is true for both oil exporters and for oil importer. For oil importers, the problem occurs because they cannot import enough oil, and oil is needed for critical parts of the economy. The belief by economists that substitution will take place is not happening in the quantity and at the price level (very low) that it needs to happen at, to keep the economy expanding as it has in the past. Limited oil supply first leads to high oil prices, as it did in the 2004 to 2008 period; then it leads to government financial distress, as governments try to deal with less employment and lower tax revenue. By the time oil prices start falling because of the poor condition of oil importers, we are well on our way down the slippery slope to financial collapse. Growth Paradigm The MSM version of this paradigm is, “Growth can be expected to continue forever.” A corollary to this is, “The economy can be expected to return to robust growth, soon.” In a finite world, this paradigm is obviously untrue. At some point, we start reaching limits of various kinds, such as fresh water limits and the inability to extract an adequate supply of oil cheaply. Economists base their models on the assumption that the economy only needs labor and capital; it doesn’t need specific resources such as fresh water and energy of the proper type. Unfortunately, substitutability among resources is not very good, and price is all-important. In the real world, growth slows as resources become more expensive to extract. The Green version of the growth paradigm seems to be, “We can have a steady state economy forever.” Unfortunately, this is just as untrue as the “Growth can be expected to continue to forever.” Even to maintain a steady state economy requires far more cheap-to-extract oil resources than the earth really has. (US shale oil resources, which are the new hope for oil growth, can only grow if oil prices are sufficiently high.)


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We are very dependent on fossil fuels for making our food supply possible and for our ability to make metals in reasonable quantity. Fossil fuels are also necessary for making concrete and glass in reasonable quantities, and for making modern renewable energy, such as hydroelectric dams, wind turbines, and PV panels. We cannot keep 7 billion people alive without fossil fuels. Perhaps the quantity of fossil fuels consumed can be temporarily reduced from current levels, but with continued population growth, any savings will be quickly offset by additional mouths to feed and by the desire of the poorest segment of the population to have the living standards of the richest. Unfortunately, the correct version of the paradigm seems to be, “Overshoot and collapse is to be expected.” This is what happens in nature, whenever any species discovers a way to way to increase its energy (food) supply. Yeast, when added to grape juice will multiply, until the yeast have consumed the available sugars and turned them to alcohol. They then die. The same pattern has happened over and over with historical civilizations. They learned to use a new approach that allowed them to increase food supply (such as clearing land of trees and farming the land, or adding irrigation to an area), but eventually population caught up. Research shows that before collapse, they reached financial limits much as we are reaching now. The symptoms, both then and now, were increasingly great wage disparity between the rich and the working class, and governments that needed ever-higher taxes to fund their operations. Eventually a Crisis period hit these historical civilizations, typically lasting 20 to 50 years. Workers rebelled against the higher taxes, and more government changes took place. Governments fought wars to get more resources, with many killed in battle. Epidemics became more of a problem, because of the weakened condition of workers who could no longer afford an adequate diet. Eventually the population was greatly reduced, sometimes to zero. A new civilization did not rise again for many years. Figure 2. One possible future path of future real (that is, inflation-adjusted) GDP, under an overshoot and collapse scenario.

It seems to me that unfortunately overshoot and collapse is the model to expect. It is not a model anyone would like to have happen, so there is great opposition when the idea is suggested. Overshoot and collapse is very similar to the model described in the 1972 book Limits to Growth by Donella Meadows and others. Role of Economics, Science, and Technology Paradigm The MSM paradigm seems to be, “Economics and the businesses that make up the economy can solve all problems.” Growth will continue. New technology will solve all


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problems. We don’t need religion any more, because we now understand what makes people happy: More stuff! As long as the economy can give people more stuff, people will be satisfied and happy. Economics even can allow us to find “green” solutions that will solve environmental problems with win-win solutions (assuming you believe MSM). The Green version of the paradigm seems to be, “Science and technology can solve all problems, and can properly alert us to future problems.” Again, we don’t need religion, because here we can put our faith in science to solve all of our problems. I am not sure the Green version of the paradigm is any more accurate than the MSM media version. Science is not good at figuring out turning points. It is very easy to miss interactions that are outside the realm of science, and more in the realm of economics–for example, the fact high-priced oil is not an adequate substitute for cheap-to-extract oil, and it is the lack of cheap oil that is causing a major portion of today’s problem. It is also very easy to put together climate change models that are based on far too high assumptions of the amount of fossil fuels that will be burned in the future, because economic interactions are missed. If debt collapse brings down the economy, it will bring down all fossil fuels at once, meaning that the vast majority of what we think of as reserves today will stay in the ground forever. A debt collapse will also affect renewables, by cutting off production of new renewables, and by making maintenance of existing systems more difficult. The real paradigm should be, “Neither science and technology, nor economics can solve the problems of humans. We have instincts similar to those of other species to reproduce in far greater numbers than needed for survival, and to utilize all resources available to us. This leads us toward overshoot and collapse scenarios, even though we have great knowledge.“ Because of our propensity toward overshoot and collapse scenarios, humans have a real need for a “moral compass” to tell us what is right and wrong. If there is no longer enough food to go around, how do we decide which family members should get it? Is it OK to start a civil war, if there are not enough resources to go around? There is also a need to deal with our many personal disappointments, such as finding that the advanced degrees we worked so hard on will have little use in the future, and that life expectancies are much lower. Perhaps there is still a need for religion, even though many have abandoned the idea. The “story line” of religions may not sound exactly reasonable, but if a particular religion can provide reasonable guidance on how to handle today’s problems, it may still be helpful. Climate Change Paradigm The MSM view of climate change seems to vary with the country. In the US, the view seems to be that it is not too important, and that it can be adapted to. Perhaps the models are not right. In Europe, there is more belief that the models are right, and that local cutbacks in fossil fuel consumption will reduce world CO2 production. The Green view of climate change seems to be, “Of course climate change models are


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100% right. We should rationally be able to solve the problem.” There is only the minor detail that humans (like other species) have a basic instinct to use energy resources at their disposal to allow more of their offspring to live and to allow themselves personally to live longer. Unfortunately, a more realistic view is that climate change may indeed be happening, and may indeed by caused by human actions, but (1) we are already on the edge of collapse. Moving collapse ahead by a few months will not solve the climate change problem, and (2) collapse itself is an even worse problem than climate change to deal with. By the time rising ocean levels become a problem, population is likely to be low enough that the remaining population can move to higher ground, and agriculture can move to where the climate is more hospitable. Climate change may indeed cause population to drop even more than it would if our only problem were overshoot and collapse. But because the cause is related to human instincts (having more offspring than needed to replace oneself and the drive to use energy supplies that are available), changing the underlying behavior is extremely difficult. Over the eons, the earth has been cycling from one climate state to another, with one species after another being the dominant species. Perhaps natural balances are such that the time has now come that humans’ turn as the dominant species is over. The earth is now ready to cycle to a state where some other species is dominant, perhaps a type of plant that can use high carbon dioxide levels. If this is the case, this is another disappointment that we will need to deal with. Nature of Our Problem Paradigm The MSM’s paradigm seems to be, “Our problem is getting the economy back to growth.” Or, perhaps, “Our problem is preventing climate change.“ In a way, the MSM paradigm of “Our problem is getting the economy back to growth,” has some truth to it. We are slipping into financial collapse, and in a sense, getting the economy back to growth would be a solution to the problem. The underlying problem, however, is that oil supply is getting more and more expensive to extract. This means that an increasing share of resources must be devoted to oil extraction, and to other necessary activities (such as desalinating water because we are reaching fresh water limits as well). As a result, the rest of the world’s economy is getting squeezed back. See my post Our Investment Sinkhole Problem. Squeezing the world’s economy creates great problems for all of the debt outstanding. The likely outcome is widespread debt defaults, and collapse of the world economy as we know it. The Green paradigm seems to be, “We have a liquid fuel supply problem.“ If we can solve this with other liquid fuels, or with electricity, we will be fine. Many Greens also emphasize the climate change problem, so their big issue is finding electric solutions for the liquid fuel supply problems. There is also an emphasis on local food production, especially with respect to perishable foods.


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Unfortunately, the real problem seems to be, “We are facing a financial collapse scenario that is likely to wreak havoc on all energy sources at once.” Using less oil products may be helpful for a while, but in the long term, we are dealing with an issue of major system collapses. Using less of a particular product “works” as long as the supply chain for that product is still intact, including the existence of all of the factories needed to make the product, and the existence of trained workers to operate the factories. Banks also need to remain open. World trade needs to continue as well, if we are to keep our supply chains operating. The real danger is that supply chains for many essential services, including fresh water, sewage disposal, medicines, grain production, road repair, and electricity transmission repair will be interrupted. As a result, we will need to find local solutions for all of them. The situation we are facing is not at all good. While we can do a little, it will be very challenging to build a new system that does not use fossil fuels. In the past, when the world did not use fossil fuels, the population was much lower than today–one billion or less. Also, in the past, we started simple, and gradually added complexity to solve the problems that arose. This time around, we need to do the reverse. We already have very complex systems, that are too difficult to maintain for the long term. What we need instead is simpler systems that can be maintained with local materials. This is not a direction in which science and technology is used to working. Creating new systems that require only local resources (and a few other resources, if transport can be arranged) will be a real challenge. Areas of the world that have never adopted modern technology would seem to have the bast chance of making such a change. Importance of Tomorrow Paradigm MSM seems to assume that we can save and plan for tomorrow. Greens have a similar view. Perhaps, given the changes that are happening, we need to change our focus more toward to day, and less toward tomorrow. How can we make today the best day possible? What are the good things we can appreciate about today? Are there simple things we can enjoy today, like sunshine, and fresh air, and our children? We have come to believe that we can and will fix all of the problems of tomorrow. Perhaps we can; but perhaps we cannot. Maybe we need to simply take each day as it comes, and solve that day’s problems as best as we can. That may be all we can reasonably accomplish.

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European gas industry's green rage Written by Andrew McKillop from AMK CONSULT DYING IN GREEN TAPE BusinessEurope president J端rgen Thumann speaking to EurActiv at the European Business Summit which opened 15 May, squarely blamed the European Commission for "the negative effects of green tape', also saying EU regulations create 'unnecessary burdensome legislative instruments in climate, energy and environment policies'. One of these is the so-called Third energy package, which is supposed to encourage Europe's gas importers, producers, pipeline transporters, distributors and users, because gas is cleaner-burning, lower emission and therefore preferable to coal for power generation. Gas-fired power is also the fastest-response, best backup power choice to run with renewable power. On the ground and in the real world however, the European gas sector is in a disastrous state and without policies to boost demand and more investment in gas supply, the power production of some EU countries could be at risk, with brownouts or blackouts at any time, top industry officials say. Europe's gas sector has been mainly hit by low growth in demand for electricity, the renewable energy boom, the collapse of ETS carbon permit prices, and competition from coal-fired plants, Jean-Francois Cirelli, co-CEO of GDF Suez SA and president of Eurogas, which represents the industry in Europe said in an interview with Reuters on 15 May. Cirelli said EU gas consumption dropped 2% in 2012 after falling 10% in 2011. Half of the decrease was caused by lower gas consumption by power plants, and the other half was attributed to the structural decline in final gas demand brought about by Europe's energy efficiency and fossil fuel substitution policies. Some EU countries, in the past 12 months have recorded declines in gas consumption, mainly due to reduced gas-fired power production, running at double digit rates. He was bluntly honest about the outlook, saying "The state of affairs in the gas sector in Europe is disastrous". As Vice-chairman of French energy company GDF Suez, one of Europe's major gas-fired power producers, he is highly aware of the combined knockout impact of Europe's "green policies", the collapse of ETS prices, and the stubborn refusal of Gazprom and other major suppliers to stop "oil indexing" gas prices for exports to Europe, which cover around 60% of consumption. Oil indexing gas prices results in European prices running at up to 4 times current US domestic gas prices.


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GREEN POLICY SHAMBLES Natural gas supplies about 25% of Europe's primary energy consumption, and gas is the main fuel for heating of 200 million citizens, some 40% of the total population of Europe. By comparison, oil supplied about 34% of Europe's total 1750 million tons oil equivalent of primary energy in 2012. Gas for power production which in some countries covers more than 20% of electric power supply, and this end-use of gas expanded rapidly in some cases, as in Germany through 2005-2010 while ETS carbon permit prices remained high (prices have fallen about 90% from their peak in 2006), gas is simply no longer competitive in Europe for power production. Because of the influx of cheap American coal no longer needed in the US due to US utilities massively increasing their gas-burn, and rock-bottom CO2 permit prices, power companies in Europe which still use, or are forced to use gas-fired plants can lose money on every single kWh of power they produce from gas. One example is Germany's biggest utility, E.On, which has about 19% of its total power capacity running on gas - and losing money on every plant. Earnings from E.On gas-fired plants dropped by 94% in the year April 2012-April 2013, E.On's CEO Johannes Teyssen said last week. Cirelli's company, GDF Suez, has mothballed or closed 7.3 GW (7300 MW) of gasfired power generating capacity since late 2009 and is set to take another 1.3 GW offline, a combined total equivalent to the operating capacity of more than eight nuclear power plants. Countries with the sharpest drop in gas-fired power include the UK where, Cirelli said in his Reuters interview, the share of gas in the generation mix fell by 15% in one year, from 40% to 25%, mainly replaced by coal, resulting in a sizeable increase in total CO2 emissions of the UK. Coal-fired power production increased from 30% of total supply, to 42% in the UK through 2011-2012. While the US has forged ahead with the "fracking" revolution, ignoring the claims of ecology and environmentalist groups, and the anti-global warming lobby, cheap shale gas is displacing coal in US power generation at double digit annual rates. US coal exports to Europe rose 23% in 2012, to more than 65 million tons as international coal prices were driven lower by declining rates of coal consumption growth in China, India and other Emerging economies. In some EU countries, the amount of electricity generated from coal is rising at annualised rates running as high as 50%, Cirelli said. EUROPE IMPORTS COAL Europe's "green policy set", enshrined in the climate-energy package voted by the European Parliament in December 2008, makes almost no mention of coal - due to King Coal being deposed, in policymakers' imagination, and replaced in Europe decades ago. Today, European imports of cheap coal - about 175 million tons a year supplied at typical prices of under $20 per barrel equivalent of oil energy, including transport - are running at the highest-ever rates. The increase rate of European coal imports is higher than coal import growth in any other region of the world. For Eurogas members like Cirelli of GDF Suez, these fast-growing coal imports "make a


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mockery of the green EU policy". "We reject shale gas and we import coal!" he said. Adding yet more mockery, Europe will soon be importing shale gas from the US, in a deal brokered by Exxon Mobil and Qatar Petroleum, the small but arrogant gas-rich emirate which racks European users by oil-indexing its gas export prices! Europe will therefore be able to import and use shale gas, and hand over profits to a renowned price gouger for current gas supplies to Europe - but is "forbidden" to produce shale gas itself, and liberate itself itself from dependence on greedy pricegougers. Eurogas member CEOs and executives are especially critical about the European Parliament, the Commission and government leaders in Europe, abandoning all effective support to the ETS CO2 market, resulting in coal-fired power producers being able to buy "bargain basement" permits and operate their facilities on bargain basement priced coal imports. They say that Europe's main climate policy tool, the CO2 market, has now reached a state of "suspended animation" following the European Parliament's April 16 rejection of support for permit prices. Pulling the European gas industry out of its nosedive is now urgent, Eurogas says, and this alone will need a major rethink on current "green policy" for Europe.

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OilVoice Magazine | June 2013  

Edition 15 of the OilVoice Magazine

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